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DQ1.
DQ2.
DQ3.
DQ4.
DQ5.
DQ6.
DQ7.
DQ8.
financial reporting is the unethical preparation of financial statements that misrepre-sent a company's financial situation or contain false information.
Unethical ways of accounting include recording and reporting business transactions that did not occur or being dishonest in recording those that did occur. Fraudulent
resulting from net income.
CHAPTER 1—Solutions
leases aircraft.
CVS and Southwest are comparable in that like all companies they have two main goals: profitability and liquidity. How companies such as CVS and Southwest achieve
organizations in a financially prudent way.
these goals may make them incomparable in certain ways. For instance, CVS is aretail (pharmacy and related) company, whereas Southwest is a service (air transpor-
Expenses and withdrawals are the same in that they both reduce the owner's capital component of owner's equity. They are different in that expenses are also a compo-nent of net income, whereas withdrawals are a distribution of assets to the owner
is an economic event, but no exchange of value has taken place with our company and thus our company records no transaction.
GAAP differs from the laws of mathematics in that they are not unchanging but rather are constantly evolving. They may change as business conditions change or as im-proved methods of accounting are introduced.
No. Not all economic events involve exchanges of value between the business and another party. For example, when a customer buys a product from a competitor, it
The primary purpose of accounting is to provide decision makers with the financial
Accounting treats sole proprietorships, partnerships, and corporations as entities separate and apart from their owners because each form represents a business
of the usefulness of the information it generates.
Like managers of profit-seeking businesses, managers of government and not-for-profit organizations must report to those who fund them, and they must operate their
ACCOUNTING PRINCIPLES ANDTHE FINANCIAL STATEMENTS
Discussion Questions
information they need to make intelligent decisions. It is a valuable discipline because
(separate entity) for which financial performance must be measured and reported.
tation) company. CVS buys and leases retail stores, whereas Southwest buys and
1-1 © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
1.
2.
3.
1.
2.
3.
1. =
2. =
3. =
1. = +
= +
– =
=
2. = +
Assets – 0.2 Assets =
0.8 Assets =
= /
=
= × =
SE3. The Accounting Equation
Assets
Owner's Equity
$240,000
$144,000
c
Short Exercises
SE1. Accounting Concepts
4.
5.
6.
a
c
bb
c
4.
5. a
a
a
Liabilities
b
$200,000
c
SE2. Forms of Business Organization
Owner's Equity
$90,000
$40,000
Owner's Equity
$150,000
$10,000
Liabilities
$40,000
0.2
SE4. The Accounting Equation
$150,000
Assets
$90,000
Owner's Equity
$240,000
$240,000
Liabilities 0.2
Assets
Assets
$50,000
$50,000
0.8
$40,000
$40,000
Assets
Assets
1-2© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
1. +
+
+
2. +
+
+
=
= += +
= +
$ 1,400
$ 1,400
57,400
$58,800
Owner's capital
Total liabilities and
owner's equityTotal assets
Wages payable
Total liabilities
*$58,800 – $3,200 – $44,000 = $11,600
Building
Owner's Equity
$11,600
3,200
$58,800
44,000
Cash
Accounts receivable
=
=
Assets Liabilities
Manteno CompanyBalance SheetJune 30, 2014
=
=
=
SE7. Preparation and Completion of a Balance Sheet
InvestmentWithdrawalsNet Income*
*($260,000 – $160,000) – $40,000 + $48,000 = $108,000
$160,000
$260,000
48,000$ 40,000
108,000
$400,000End of year:
$140,000
During year:
SE5. The Accounting Equation
Assets
End:
$108,000
$96,000
Owner's Equity $280,000
Beginning of year:
Liabilities$120,000
==
Net income
SE6. The Accounting Equation and Net Income
Change:
$ 45,000
$ 75,000
$96,000
Owner's Equity
+ 5,000
$ 40,000
End:
Beginning: Assets
$100,000
$100,000$196,000
Owner's Equity
$196,000Assets
Beginning:
Change:
$ 90,000Liabilities $ 90,000 $50,000
$50,000
Owner's Equity
===
Liabilities
+ 30,000
$120,000
$ 40,000
– 30,000
$166,000Owner's Equity
+ 40,000
$236,000 $ 70,000
*
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$4,800
2,450
$2,350
$ 5002,350
$2,850410
$2,440
Accounts payable $ 450
Other assets Total liabilities $ 450
Owner's capital 2,440
Total liabilities and
Total assets owner's equity $2,890
1. 6.2. 7.3. 8.4. 9.5. 10.
1. 3.2. 4.
b da c
SE 10. Ethics and Accounting
c je h
g if db a
SE9. Accounting and Business Enterprises
Less withdrawals
Owner's capital, December 31, 2014
Owner's capital, December 31, 2013
Net income for the year
Randall CompanyBalance Sheet
SE8. Preparation of Financial Statements
For the Year Ended December 31, 2014
December 31, 2014
Total expenses
Cash
Liabilities
Randall CompanyStatement of Owner's Equity
Subtotal
For the Year Ended December 31, 2014
Randall CompanyIncome Statement
Net income
Revenues:
Service revenue
Expenses:
$2,890
Owner's Equity
Assets
$1,890
1,000
1-4© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
1.
2.
3.
4.
1. 6.2. 7.3. 8.4. 9.5. 10.
2,000,000 × $2,000,000
5,000,000 × $650,000
350,000,000 × $4,200,000
3,000,000 × $3,960,000
1,300,000 × $1,300,000
2,400,000 × $312,000
250,000,000 × $3,000,000
3,900,000 × $5,148,000
Yes, this is an expense of the business.
Yes, this is an expense of the business.
place.
Yes, this is an expense of the business (assuming that Austin intends to repay the
ab
E2A. Accounting Concepts
loan).
No, this is not a business transaction because no economic exchange has taken
Exercises: Set A
E1A. Business Transactions
cc
ba
Aiko is the largest in terms of sales and Orca is the largest in terms of assets.
0.130
0.012
1.320
=
=
=
=
ab
0.130
0.012
Sales
Dao
Company
Abril Chip
=
1.000
=
=
1.000
Orca
Assets
Aiko
Company
1.320
E3A. Money Measure
=
Orca
Dao
ac
Aiko
Abril Chip
1-5 © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
1. = Liabilities +
= Liabilities +
=
2. = Liabilities +
= $72,000 +
=
3. = 1/3 Assets +
=
=
= 1/3 × $240,000 = $80,000
4. = Liabilities +
=
= $125,000 +
= $102,500 +
=
1.
= Liabilities +
$275,000 = $162,500 +
175,000 = 68,750 +
2.
3.
4.
Beginning:
E4A. The Accounting Equation
$150,000– 22,500
$150,000
Liabilities
$350,000
Assets Owner's Equity
$275,000
Owner's Equity
Owner's Equity
$400,000 $155,000
Liabilities
Assets $151,500
Liabilities
$160,000
Assets $240,000
Assets $160,000
Assets
$247,500
$125,000
$275,000
Change: + 75,000
End:
$245,000
$79,500
Assets
2/3 Assets
Owner's Equity
106,250
Owner's Equity
$112,500
Net income is:
Net income
27,500
$ 33,750
Net income is:
Change in owner's equity
+ Owner's withdrawals
Net loss is:
Change in owner's equity
– Owner's investments
Net loss
$(10,000)
16,250
$(10,000)
$ 6,250
$ 6,250
$33,750
$ 6,250
Net income
Change in owner's equity
+ Owner's withdrawals
– Owner's investments
Net income
Assets
End:
Beginning:
$21,250
$ 6,250
$ 33,75012,500
E5A. Owner's Equity and the Accounting Equation
27,500
$6,250
$ 21,250
Net income is:
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1. a. 2. a.
b. b.
c. c.
d. d.
e. e.
f. f.
g. g.
$ 25,000 $ 50,000
62,500 $ 50,000
112,500 212,500
50,000
$262,500 $262,500
IS
BS
IS
BS
IS
BS
OE
E6A. Identification of Accounts
A
L
Oxford Services Company
Accounts receivable Total liabilities
J. Oxford, capital
Equipment
12,500 Owner's Equity
E7A. Preparation of a Balance Sheet
owner's equityTotal assets
Liabilities
Total liabilities and
Balance SheetDecember 31, 2014
Assets
Accounts payableCash
Building
Supplies
A
OE
A
L
A
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$13,200
$1,200
8,340
1,350900
11,790
$ 1,410
$1,000
1,2401,410
$3,650700
$2,950
$1,550 $ 450
750 $ 450
Land 1,000 2,950
$3,400 $3,400
Total expenses
Expenses:
Net income
E8A. Preparation and Integration of Financial Statements
Owner's capital
100 Supplies
Utilities expense
Subtotal
Dukakis Company
Net income for the year
Statement of Owner's Equity
Revenues:
Service revenue
Wages expense
Rent expense
Less withdrawals
For the Year Ended December 31, 2014
Owner's capital, December 31, 2013
Investments by K. Dukakis
Advertising expense
Total liabilities
Dukakis CompanyIncome Statement
For the Year Ended December 31, 2014
Assets Liabilities
December 31, 2014
Owner's capital, December 31, 2014
Owner's Equity
Total liabilities and
Accounts payable
Total assets
Dukakis CompanyBalance Sheet
Accounts receivable
Cash
owner's equity
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$ 32,500
cash flows from operating activities:
$ (7,800)11,700 3,900
$ 36,400
$(117,000)
(117,000)
$ 78,000(19,500)
58,500
$ (22,100)55,900
$ 33,800
$102,40357,087
$159,490—
$159,490
by the business's revenues and expenses.
or pay off debt.
Less withdrawals
Owner's equity represents the claims by the owner of a business to the assets of the busi-ness. It is affected by the owner's investments in and withdrawals from the business and
The owner of Mrs. Shah's Cookies may have decided not to make any withdrawals because
Borrowings from bank
Increase in accounts receivable
Net increase (decrease) in cash
Purchase of equipment
Owner's withdrawals
Net cash flows from operating activities
Net cash flows from financing activities
Cash flows from operating activities:
Statement of Owner's Equity
Owner's capital, January 31, 2014
she wanted to use the funds for other purposes such as to finance the company's growth
For the Year Ended January 31, 2014
Cash at beginning of year
Adjustments to reconcile net income to net
Net income
Increase in accounts payable
For the Year Ended December 31, 2014
Cash flows from investing activities:
Cash flows from financing activities:
Net cash flows used by investing activities
Owner's capital, January 31, 2013
Net income for the year
Subtotal
Cash at end of year
Mrs. Shah's Cookies
E10A. Statement of Owner's Equity
E9A. Statement of Cash Flows
Arlington Service CompanyStatement of Cash Flows
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●
●
●
●
●
●
●
●
1. b 5. l 9. c
2. k 6. f 10. d
3. g 7. a 11. e
4. i 8. j 12. h
Thus, start with (c), which must equal $3,000 (check: $29,000 + $3,000 – $2,000 = $30,000).Then, (b) equals (c), or $3,000. Thus, (a) must equal $8,100 (check: $11,100 – $8,100 = $3,000). Because (e) equals $30,000 (ending balance from the statement of owner's
E11A. Preparation and Integration of Financial Statements
that has been granted a charter from the state and is legally separate from its owners
Net income links the income statement and the statement of owner's equity. The ending balance of owner's equity links the statement of owner's equity and the balance sheet.
equity), (f) must equal $46,000 (check: $16,000 + $30,000 = $46,000). Finally, (d) must
A partnership is a business that has two or more owners. A corporation is a business unit
Customers
Economic planners
Regulators
equal (f), or $46,000.
People who are interested in Avalon's financial statements are the following:
Management
Investors (owners of the company)
ship of a partnership changes, the partnership must be dissolved and another one formed.
obligations of a partnership. Also, the transfer of ownership is easier with the corporation
E13A. The Nature of Accounting
in the company, whereas the personal assets of partners can be called upon to pay the
because the shares owned by a stockholder can be sold to another party. When owner-
E12A. Users of Accounting Information and Forms of Business Organization
(stockholders). A major advantage of the corporate form of business over the partnership
Tax authorities
Employees
Creditors
is that the stockholders' liability is limited to the amount of the stockholders' investments
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1.
2.
3.
4.
5.
AICPA:
SEC:
GASB:
IASB:
IMA:
IRS:
PCAOB:
GAAP:
FASB:
d
Note to Instructor: Solutions for Exercises: Set B are provided separately on the Instructor's Resource CD and website.
e
a
c
b
American Institute of Certified Public Accountants
Public Company Accounting Oversight Board
Generally Accepted Accounting Principles
Financial Accounting Standards Board
Internal Revenue Service
International Accounting Standards Board
Securities and Exchange Commission
Governmental Accounting Standards Board
CPA:
E14A. Accounting Abbreviations
Certified Public Accountant
Institute of Management Accountants
E15A. Ethics and Accounting
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1. IS Utilities expense BSBS Building ISBS/OE Owner's capital OEIS/OE Net income ISBS Land BSBS Equipment BSIS Revenues ISBS
2.
$1,100 $ 6,800 (g) $240800 (a) 5,200 160 (m)
$ 300 (b) $ 1,600 (h) $ 80
$2,900 $24,400 $340
300 (c) 1,600 80 (n)200 — (i) 40 (o)
$3,000 $26,000 (j) $380 (p)
$4,600 (d) $31,000 $380 (q)
$1,600 $ 5,000 $ — (r)3,000 (e) 26,000 (k) 380
$4,600 (f) $31,000 (l) $380
2.
Accounts receivable
necessary to determine the ending balance of owner's capital. The statement of owner's equity is prepared second because it provides the ending balance of the owner's equity for the balance sheet, which is prepared last.
The income statement must be prepared first because the amount of net income is
P2. Integration of Financial Statements
Set A
Total liabilities and owner's equity
Set B
Income Statement
Beginning balance
Net income
Less withdrawals
Statement of Owner's Equity
Ending balance
WithdrawalsFees earned
Supplies
Balance Sheet
The income statement is most closely associated with the goal of profitability.
Expenses
Net income
Cash
Set C1.
Problems
P1. Preparation and Interpretation of Financial Statements
Wages expense
Accounts payableRent expense
Total assets
Total liabilities
Owner's capital
Revenue
1-12© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
1.
$400,000
$225,000
20,100
36,000
2,600
5,10032,000
320,800
$ 79,200
$ 64,30079,200
$143,50033,000
$110,500
$ 71,700 Accounts payable $ 3,600
4,500 22,700
700 $ 26,300
59,900
110,500
$136,800 $136,800
2.
Fuel Designs
Total assets
Subtotal
Less withdrawals
Revenues:
December 31, 2014
Net income for the year
Liabilities
Total expenses
Fuel Designs
Marketing expense
Owner's Equity
Equipment
Net income
Owner's capital, December 31, 2013
Statement of Owner's EquityFor the Year Ended December 31, 2014
Office rent expense
Owner's capital, December 31, 2014
Telephone and computer expenses
Assets
Balance Sheet
Total liabilities
Income StatementFor the Year Ended December 31, 2014
Wages expense
Expenses:
Supplies expense
Commission sales revenue
Commissions expense
Cash
Supplies
Accounts receivable
The statement of cash flows is very useful in assessing whether a company's operationsare generating sufficient funds to support expansion. The statement tells whether
Commissions payable
Fuel Designs
Owner's capital
Total liabilities and
owner's equity
P3. Preparation and Interpretation of Financial Statements
operations are producing enough cash or whether the company will need to obtainoutside financing from creditors or owners.
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1.
$159,200
$37,200
4,500
86,000
19,10010,800
157,600
$ 1,600
$ —
5,0001,600
$ 6,600—
$ 6,600
$ 1,800 $19,400
24,600 1,300
900 $ 20,700
6,600
$27,300 $ 27,300
2.low in that it has earned only $1,600 on revenues of $159,200. Liquidity is low because the company has cash of only $1,800 and liabilities of $20,700, but will likely receive$24,600 from customers.
A. Francis, capital, January 31, 2014
Frequent Ad
Equipment rental expense
Revenues:
For the Year Ended January 31, 2014
Supplies expense
Subtotal
Frequent AdIncome Statement
Accounts receivable
Cash
Salaries payable
Frequent Ad
Liabilities
Salaries expense
Assets
The company is challenged both in terms of profitability and liquidity. Profitability is
Total assets
Accounts payable
Net income for the year
Marketing expense
Net income
Office rent expense
Total expenses
Balance Sheet
Owner's Equity
Total liabilities
A. Francis, capital
P4. Preparation and Interpretation of Financial Statements
January 31, 2014
A. Francis, capital, January 31, 2013
Investments by A. Francis
Less withdrawals
Statement of Owner's Equity
Advertising service revenue
Expenses:
owner's equity
Total liabilities and
For the Year Ended January 31, 2014
Supplies
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1.
2.
3.
4.
P5. Use and Interpretation of Financial Statements
When deciding whether to make a loan to a company, a banker evaluates the com-
The income statement shows net income of $3,775 earned by the company over a month. The amount of net income is necessary for the preparation of the statement of owner's equity. The statement of owner's equity shows an ending balance of
associated with the goal of liquidity, because it shows the changes in cash.
come on revenues of $6,100. The owner also withdrew money in the amount of
it has liabilities of $11,250 and cash of only $6,700.
pany's management and can be falsified for personal gain. To lend credibility to the
form to GAAP in all material respects.audit would determine that the financial statements present the data fairly and con-
pany's ability to pay interest charges and repay the loan at the appropriate time. Ac-cordingly, a banker studies the company's liquidity and cash as well as its profitability. That information is represented in financial statements, which are prepared by a com-
The company appears to be very profitable because it has earned $3,775 of net in-
$2,400. However, the return on total assets (net income divided by total assets) is
pany might experience some challenges in its liquidity position in the future because only 6.98 percent, or $0.0698 on each dollar of assets invested. Moreover, the com-
financial statements, the banker may request an independent audit by a CPA. The
shown on the balance sheet.
cause it shows the earnings of the business. The cash flow statement is most closely The income statement is most closely associated with the goal of profitability, be-
$42,850. The ending balance of owner's capital appears in the owner's equity section of the balance sheet. The statement of cash flows explains the changes in the cash balance during the month, and the ending amount should match the cash balance
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Wages expense BSEquipment ISEquipment rental expense OENet income ISLand BSOwner's capital BSRevenues ISAccounts receivable
2.
$2,400 $13,200 (g) $ 4801,620 (a) 10,000 184 (m)
$ 780 (b) $ 3,200 (h) $ 296
$5,800 $48,800 $480
780 (c) 3,200 296 (n)400 2,000 (i) 216 (o)
$6,180 $50,000 (j) $560 (p)
$9,380 (d) $60,000 $1,160 (q)
$3,200 $10,000 $ 600 (r)6,180 (e) 50,000 (k) 560
$9,380 (f) $60,000 (l) $1,160
2.
Revenues
Set A
Income Statement
Less withdrawals
Ending balance
Net income
Expenses
Net income
Statement of Owner's Equity
Total liabilities and owner's equity
Balance Sheet
Total assets
Total liabilities
Beginning balance
P7. Integration of Financial Statements
necessary to determine the ending balance of owner's equity. The statement ofowner's equity is prepared second because it provides the ending balance of owner's
Owner's capital
1. Set CSet B
capital for the balance sheet, which is prepared last.
P6. Preparation and Interpretation of Financial Statements
Alternate Problems
The income statement must be prepared first because the amount of net income is
ISBS
BS/OEISBS
1.
ISIS/OEBS
Utilities expense
The income statement is most closely associated with the goal of profitability.
Accounts payableRent expenseWithdrawalsFees earnedCash Supplies
1-16© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
1.
$248,000
$19,700
18,200
96,0003,100
137,000
$111,000
$ 70,400111,000
$181,40040,000
$141,400
$141,600 Accounts payable $ 7,400
9,100 2,700
800 $ 10,100
141,400
$151,500 $151,500
2. The company's ability to pay its bills or its liquidity appears good because it has cash of $141,600 and total liabilities of only $10,100.
Assets
Cash
Owner's capital, November 30, 2013
Sears LabsBalance Sheet
Subtotal
Less withdrawals
Owner's capital, November 30, 2014
Total assets owner's equity
Owner's Equity
P8. Preparation and Interpretation of Financial Statements
Design service revenue
Expenses:
Sears LabsIncome Statement
For the Year Ended November 30, 2014
Revenues:
Marketing expense
Office rent expense
Supplies expense
Total expenses
Supplies
Liabilities
Salaries expense
Net income
Accounts receivable Salaries payable
Sears LabsStatement of Owner's Equity
November 30, 2014
For the Year Ended November 30, 2014
Net income for the year
Total liabilities
Owner's capital
Total liabilities and
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1.
$164,000
$ 5,800
3,000
112,000
8,20014,400
143,400
$ 20,600
$ —
4,00020,600
$24,6002,000
$22,600
$ 5,200 $21,000
26,400 1,400
800 $22,40012,600
22,600
$45,000 $45,000
2.and is liable for all obligations of the firm. Partners, on the other hand, share profits
Bachino's Pizza
Expenses:
Total expenses
For the Year Ended September 30, 2014
Equipment rental expense
Marketing expense
Salaries expense
Supplies expense
Revenues:
Net income for the year
Pizza revenue
The owner of a sole proprietorship receives all the profit (or losses) of the company
September 30, 2014
Net income
Bachino's PizzaStatement of Owner's Equity
Cash Accounts payable
Equipment
Income StatementFor the Year Ended September 30, 2014
Owner's capital, September 30, 2014
P9. Preparation and Interpretation of Financial Statements
Owner's Equity
Bachino's Pizza
Investments by owner
(or losses) and obligations, but each partner brings specific talents to the partnership.
Subtotal
Less withdrawals
Supplies Total liabilities
Salaries payable
Assets Liabilities
Balance Sheet
Delivery truck rent expense
Total assets
Owner's capital, September 30, 2013
Accounts receivable
Owner's capital
Total liabilities and
owner's equity
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1.
2.
3.
4.
P10. Use and Interpretation of Financial Statements
The income statement is most closely associated with the goal of profitability, be-cause it shows the earnings of the business. The cash flow statement is most closely
perience some challenges in its liquidity position in the future because it has liabilities
The income statement shows net income of $3,600 earned by the company over a period of time. The amount of net income is necessary for the preparation of the
the cash balance during the year, and the ending cash shown should match the cash
statement of owner's equity. The statement of owner's equity shows an ending bal-ance of $41,175. The ending balance of owner's capital appears in the owner's equity section of the balance sheet. The statement of cash flows explains the changes in
cent, or $0.0660 on each dollar of assets invested. Moreover, the company might ex-
associated with the goal of liquidity, because it shows the changes in cash.
The company appears to be very profitable because it has earned $3,600 of net income on revenues of $5,925. The owner also withdrew money in the amount of $2,400. How-ever, the return on total assets (net income divided by total assets) is only 6.60 per-
cordingly, a banker studies the company's liquidity and cash flows as well as its profitability. That information is represented in financial statements, which are pre-
When deciding whether to make a loan to a company, a banker evaluates the com-pany's ability to pay interest charges and repay the loan at the appropriate time. Ac-
pared by a company's management and can be falsified for personal gain. To lend credibility to the financial statements, the banker may request an independent audit
fairly and conform to GAAP in all material respects.by a CPA. The audit would determine that the financial statements present the data
balance that appears on the balance sheet.
of $13,350 and cash of only $7,125.
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ning its business). Financing activities include obtaining capital from owners and from
Cases
resources when they are no longer needed by the business. Operating activities include
creditors, such as banks and suppliers. They also include repaying creditors and paying a return to the owners. Investing activities include buying land, buildings, equipment, and
selling merchandise and services to customers; employing managers and workers; buying,
C1. Conceptual Understanding: Business Activities and Management Functions
other long-lived resources needed in the operation of the business and the sale of these
The three basic activities in which Costco will engage to achieve its goals are financing activities (obtaining adequate funds or capital to operate its business), investing activities (spending the capital it receives so that it will be productive), and operating activities (run-
management must perform to fulfill its responsibilities are obtaining financial resources(assets) so the company can continue operating (financial management); investing the
(asset management); developing and producing goods and services (operations manage-financial resources of the business in productive assets that support the company's goals
producing, and selling goods and services; and paying taxes to the government.
Costco's management is the group of people who have overall responsibility for operatingthe business and for meeting the company's profitability and liquidity goals. The functions
Assets are economic resources owned by a business that are expected to benefit future operations. The people in an organization are not assets of the business because they arenot owned by the business. Businesses pay their employees on a periodic basis (hourly, weekly, monthly, or annually); they do not buy employees. Salaries, wages, and other costs associated with employment are considered expenses and appear on the income statement.
ment); selling, advertising, and distributing goods and services (marketing management); hiring, evaluating, and compensating employees (human resource management); and cap-turing, organizing, and communicating data about all aspects of the company's operations (information management). Accounting is covered by the last function.
C2. Conceptual Understanding: Concept of an Asset
of hiring, training, motivating, and compensating high-quality employees who will benefit future operations. Airlines depend on their ability to develop and keep competent and motivated individuals. And their success in attracting and retaining high-quality employees depends on the opportunities and compensation they provide.
Southwest Airlines considers its people to be its most important asset because of the costs
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by public companies.
C3. Conceptual Understanding: Generally Accepted Accounting Principles
Generally accepted accounting principles (GAAP) encompass the conventions, rules, and procedures necessary to define accepted practice at a particular time. When financial
financial analysts will understand the significance of the amounts in the financial state-
Some bodies that influence GAAP are as follows:
ments and will be able to assess a company's performance with confidence.
statements are prepared in accordance with GAAP and audited by an independent CPA,
Public Company Accounting Oversight Board (PCAOB): Regulates financial reporting
International Accounting Standards Board (IASB): Sets international accounting standards.
Internal Revenue Service (IRS): Influences practice through rules for determining income tax liabilities. These rules sometimes conflict with GAAP.
Governmental Accounting Standards Board (GASB): Issues accounting standards for government entities.
Financial Accounting Standards Board (FASB): The most important body that issues generally accepted accounting principles.
American Institute of Certified Public Accountants (AICPA): Influences accounting prac-tice through its senior technical committees.
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1.
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2.
= Liabilities + Stockholders' Equity
= $26,492 + $38,051
3.
4.
5.
6.
7.
earnings
The names CVS gives its four basic financial statements are as follows:
The accounting equation for CVS on December 31, 2011, is as follows:
(in millions)
Assets
$64,543
Total revenues of CVS for the year ended December 31, 2011 were $107,100 million.
of $3,424 million for the year ended December 31, 2010.
C4. Interpreting Financial Reports: Analysis of Four Basic Financial Statements
Consolidated statements of income
Consolidated balance sheets
Consolidated statements of cash flows
Consolidated statements of shareholders' equity; includes data for retained
investing activities were negative and greater in 2011 than in 2010, and cash flows used by financing activities were also negative and greater in 2011 than in 2010.
No, the company's cash and cash equivalents decreased by $14 million. This numbercan be found toward the bottom of the statement of cash flows or can be computed by taking the difference of the cash and cash equivalents from the December 31, 2010and December 31, 2011 balance sheets.
CVS was audited by Ernst & Young LLP. The auditors' report is important because it tells whether or not the company's financial statements and accompanying informa-tion are prepared in accordance with generally accepted accounting principles. If this is so, then the reader of the financial statements can rely on them and analyze them. The auditors' report lends credibility to the financial statements.
Yes. The company earned $3,461 million. This was an increase from net earnings
Cash flows from operating activities increased from 2010 to 2011. Cash flows used by
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1.
2.
3.
With sales of $107,100 million and total assets of $64,543 million, CVS is much larger than Southwest, which has revenues of $15,658 million and total assets of $18,068 mil-
Neither assets nor revenues are better than the other to measure the size of a com-
lion. Note that CVS generates 6.9 times as much sales on about 3.6 times the total assets of Southwest.
pany. Assets tell how large a company's resources are, and revenues tell how well the
C5. Comparison Analysis: Performance Measures and Financial Statements
company is able to generate revenue. Both are useful measures of a company's size.
CVS has net income (earnings) of $3,457 million, which is about 19 times more than
CVS has cash and cash equivalents of $1,413 million compared to Southwest's cash and cash equivalents of $829 million. CVS's cash decreased by $14 million comparedto the $432 million decrease by Southwest. CVS had cash flows from operating activi-ties of $5,856 million compared with Southwest's cash flows from operating activities of $1,385 million.
from 2009 to 2010 but then decreased greatly from 2010 to 2011.
Southwest's earnings of $178 million. CVS's net income declined from 2009 to 2010, but increased slightly from 2010 to 2011. Southwest's net income increased significantly
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1.
2.
3.
4.
5.
6.
hourly rate. The information should not be disclosed because of its confidential nature.
a superior as soon as the problem is recognized. The third alternative is the best be-cause there may be some other reason that the job cannot be done in the allotted time. Underreporting hours usually is not tolerated by CPA firms.
This is a common problem faced by young accountants. The alternative courses of
The ethical situations are presented for discussion purposes. Students are likely to have many different viewpoints.
The alternative courses of action are to disclose or not to disclose the employee's
flict of interest, the appropriate action would be to return the gift.
The courses of action are to disclose the investment or not to disclose the investment.
Note to Instructor: Answers will vary depending on company selected.
C7. Continuing Case: Annual Report Project
C6. Ethical Dilemma: Professional Situations
The alternative courses of action are to report or not to report the $200 in cash. Ac-countants must maintain their integrity, which means being honest. The $200 should be reported; it would be illegal not to report it.
A CPA must avoid even the appearance of a conflict of interest. To be independent, the CPA should disclose the investment and then sell the stock.
them to the home office. It might also be possible to discuss them with the manager in private. This is a difficult situation because of the possibility of retribution. If the manager does not take appropriate remedial action, the accountant should report his actions, even if it means having to look for another job.
The alternative courses of action are to ignore the inappropriate expenses or to report
action are to do the work and not report it, to do the work and report it, or to talk to
The alternative courses of action are to accept the gift or to return it. To avoid a con-
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